Australia as a model for unilateral tariff cuts

Lukewarm support for tariff cuts is consistent with a central contention of public choice that voters are rationally ignorant of policies that would benefit them. In a democracy, it is theorised, good policies are an underprovided good. As the costs of tariffs are spread across an entire population while the benefits concentrated in particular industries, consumers naturally have little monetary incentive to investigate government policies. For this reason, polls do not show overwhelming opposition to protectionism. The protected industries, on the other hand, are motivated to lobby the government as they stand to lose significantly from open competition.

This explains why, for much of Australia’s trading history, a mentality of mercantilism was dominant. It took 60 years from federation for politicians to begin dismantling the protective state. It wasn’t until the Tariff Board began surveying the evidence for and against free trade in a systematic manner during the 1960s, that the costs of trade barriers were de-mystified. In response to the economic ailments caused by protectionism, three major tariff cuts — in 1973, 1988 and 1991 — were implemented.

It is now agreed that protectionism imposed many costs, the brunt of which fell on the consumer. Import restrictions pushed up the cost of living and limited the range and quality of goods and services available. There were also efficiency costs. Productivity declined as domestic producers were sheltered from international competition and didn’t have to face the discipline of the market. As a consequence, growth in real incomes during the period of protectionism was disappointing.

Given that the evidence in favour of free trade is so overwhelming, it’s odd that recent governments have chosen to move towards free trade through the most cumbersome and ineffective means possible – bilateral and multilateral trade deals. These result in “government managed trade”, with special concessions given to favoured industries and groups. Genuine free trade would probably only require a few pages of legislation, instead of many thousands.

The 1980s showed there’s a better way that doesn’t involve as much wastage of paper: unilaterally lower trade barriers; treat all nations equally; and follow through with promises to stick to a time-frame.

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10 thoughts on “Australia as a model for unilateral tariff cuts”

In some ways it is better to forget timeframes and just cut tariffs. That way the industries concerned either adapt and survive or else they stop lobbying you. 😉

Today however the biggest tariff I face is when my household imports stuff from my neighbours household. Domestic taxes on interhousehold trade are a far greater concern than the remaining tariffs on foreign imports. We could import home renovation services and materials, take away food, domestic services, manufactured goods, financial advice, child care, entertainment and a whole host of things much cheaper if only they would lower the dreaded income tariff.

Didn’t Nicholas Gruen write a report recently arguing that reducing the automotive industry tariff from 10% to 5% would have minimal benefits. In fact, I think he argued that in net terms the costs would outweigh the benefits. If I remember correctly, he claimed there is an “optimal” tariff level, not too high, not too low.

The effective rate of assistance (all up and multiplied tariff effect) means that tariffs cost 2.5 times higher than their nominal rate.

So cars effectively are 25% more costly than they need be.

How does this help the living standards of Australia and what are the costs of removing tariffs?

The costs are industry adjustment which has been highly overrated. The costs are overly expensive inputs and consumables to the rest of the country.

How do tariffs change the production function – how do they increase our available resources, or how would tariff reform decrease our available resources? That is what economists have to answer.

Optimal tariffs are the weakest theoretical models in international trade research. They have a lot of research and sophisticated maths behind them but they are a very weak model with over restrictive assumptions. In the real world they don’t work.

Gruen’s article (“Yes, tariffs can be too low”) appeared in yesterday’s (15 July) AFR. Sinclair Davidson wrote a reply in the letters section today (“Gruen bamboozles on optimal tariffs”). Unfortunately, the AFR is pay to view.

Nicholas Gruen tells us that the Productivity Commission “has never liked the optimal tariff argument” (Yes, tariffs can be too low, AFR 15 July 2008). That is probably due to the restrictive assumptions which underlay that theory. Australia does not have market power in either import or export markets; the optimal tariff theory would then predict that national welfare falls when tariffs are imposed. This result must be true irrespective of the modelling efforts of both the Productivity Commission and consultant Lateral Economics. Australian tariffs enrich local producers and government at the expense of Australian consumers. The tragedy here is that local producers also receive government subsidies. This simply enhances the distortions associated with industry policy and protectionism. Gruen ignores that economists have long known that unilateral free trade enhances economic welfare. His piece is simply the latest in a long line of anti-economic arguments designed to bamboozle people into believing that tariffs do not ultimately harm consumers.

I’m not defending protectionism, far from it. I was just pointing out that on the same day you posted your comments attacking tariffs, someone who claims to be an economist wrote an article claiming that (in low dosages) they are beneficial.

Nick Gruen admits he’s not against free trade either. He’s weaseling his way out of that debate, as he knows the economic arguments in favour of protectionism are flimsy. But he’s using a diversionary argument to cast doubt in the public’s mind.

This is similar to the tactic used by Fred Argy & John Quiggin with regards to the NSW electricity privatisation. This appears to be what these guys do when they are faced with better arguments that don’t suit their ideological preferences – they come up with a side-issue and wrongly use it to taint the main issue.

Here’s a study that finds strong support for free trade among American economists (we can treat the views of the Americans as somewhat more credible, as they lead the world in economics).

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